OTTAWA — Jonathan Poma has spent a lot of time in the world that Shopify built. In February 2013, the Columbus, Ohio entrepreneur launched a T-shirt brand on Shopify’s then-new enterprise offering for big businesses looking to online retail; a year later, he started an agency to do the same for other sellers. “There’s a small community of us who’ve been in e-commerce for that long,” he said.
So last year, when Poma went out to raise a Series B for his startup Loop Returns, another name from that tight-knit ecosystem was on his call sheet: Satish Kanwar, now Shopify’s vice-president of product acceleration. In July 2021, the Ottawa-headquartered commerce firm joined a US$65-million round for Loop, which makes tools Shopify merchants can use to handle returns and exchanges. “Shopify was a very clear, compelling strategic partner,” Poma said.
Loop isn’t the only firm building tools for Shopify merchants in which Kanwar and co have invested—the Canadian tech giant has racked up at least 20 deals in just over two years. Beyond capital, Shopify’s portfolio firms get the company’s stamp of approval, and the chance to work with it more closely. But some developers worry Shopify is playing favourites.
Talking Points
- Shopify has accelerated its venture activity over the past two years, making investments and forming strategic partnerships with some of the developers that build apps for its commerce platform
- Portfolio firms say the Ottawa-headquartered firm brings guidance and credibility in addition to capital, but some of their competitors worry it’s picking favourites
- Regulators are increasingly paying attention to app store operators
Partners have long been an important part of Shopify’s business model. In June 2009—just a few years after founder Tobi Lütke pivoted from snowboard webstore to webstore-software provider—the firm launched its API (software that lets computer programs talk to each other) and an app store, inviting other developers to build tools for its then 5,000-plus merchants.
Shopify’s merchant base now numbers over two million, and it brought in US$4.61 billion in revenue last year. The partner ecosystem has grown with the company. Shopify’s app store now contains over 8,000 marketing, design and other tools its merchants can use, and app developers made US$411 million via the platform last year. That’s up from 900 and US$11 million, respectively, in 2015.
While Shopify gets a share of those riches—it earns a cut of the fees they charge—the partner ecosystem is also a moat around its core business. “The larger your app development community, the more potential opportunities you have to address merchant needs,” said Ken Wong, managing director for software research at Oppenheimer & Co. Shopify’s community far exceeds those of competing commerce platforms like BigCommerce or Adobe’s Magento, Wong said.
Shopify can’t build every e-commerce feature a brand or retailer might want or need, so it relies on its partners to fill in the gaps. Shopify’s merchants—many of which are small- and midsized firms without IT departments to manage their tech stacks—can expect tools they install from Shopify’s app store to work well, said Wong. “You just need it to be simple and easy.”
Developers say Shopify has in turn made their work easy by offering them robust documentation, videos and other resources to help them build apps. It’s also fostered community with conferences, online forums and a Discord server for developers. “It’s been nothing but good for us,” said Stuart Chaney, CEO of Las Vegas-based Rivo Commerce, whose 35 staff and three customer loyalty and product review apps are focused solely on Shopify. Rivo had explored launching its offerings for other e-commerce services, but “the juice wasn’t worth the squeeze.”
Having partners has always paid off for Shopify—they help bring in merchants and keep them on its platforms. But the company has lately taken an increased financial interest in its ecosystem, following a high-profile instance of FOMO.
In November 2020, San Francisco-based fintech Affirm’s IPO filing revealed it had granted Shopify warrants, which would let Shopify take a substantial stake in Affirm, as part of an agreement to have Shopify use Affirm’s buy now, pay later (BNPL) service for its Shop Pay Installments feature. Shopify did a similar deal with Israel’s Global-e, using that company’s merchant-of-record offering to underpin its Markets Pro international-selling tools; Global-e went public in May.
Weaving warrants into white-label deals is a new way of working for Shopify, after the success of an early partner in which it didn’t take a stake. Under a July 2013 agreement, San Francisco-based Stripe handles processing for the lucrative Shopify Payments service. Stripe was valued at US$1.75 billion in a funding round soon after, one in which Shopify didn’t participate. Stripe’s latest raise, in March 2021, put its price tag at US$95 billion. Shopify has reportedly paid more than US$350 million to buy up shares in the firm.
Over the last two years, Shopify has also invested directly in developers that make popular apps for its platform.
Photo: Hanna Lee for The Logic
Take Poma’s Loop, which Shopify has backed. Some 1,800 Shopify merchants now handle returns using Loop’s software, which nudges shoppers to exchange products rather than ask for a refund. The company’s clients account for about a ninth of total sales made via Shopify.
Poma wants a “deep product partnership” with his new investor. The two firms worked together on a new API that lets merchants manage returns across all their software systems. “We’re helping build that architecture to make sure that Shopify’s data actually scales with what merchants need,” said Poma, noting that nine months ago, Shopify’s software only recognized orders and refunds. “There was no object called a ‘return.’”
Competing developers will doubtlessly use and build on the new API. But the collaboration gave Loop the opportunity to “write the RFP,” Poma said, so that “everything Shopify will do is hopefully going to work turnkey with us.” He’d like to partner further with Shopify as the Canadian firm builds out its fulfillment network and consumer-facing Shop App, neither of which currently accommodate returns. Since adding Shopify to its cap table, Loop has also picked up lessons on how to grow via its own product offerings, and how to service different kinds of merchants.
Shopify’s other portfolio firms are also hoping to benefit from its expertise, not just its cash. In October, Shopify participated in Hong Kong-based WATI’s US$23-million Series B round, its first disclosed investment in Asia. Retail brands, edtech providers and other clients use WATI’s software to engage with and market to customers via WhatsApp. With Shopify on board, WATI CEO Ken Yeung said, “we want to double down on the commerce use case.”
Yeung wants to let small businesses go beyond sending promotional messages and displaying product catalogs to actually making sales via chat. “It’s just one extra touchpoint for the customer to make the purchase, and make the choice easier.” Shopify merchants currently make up a relatively small share of WATI’s clientele, but Yeung sees room to grow as the Canadian firm itself expands in Asian markets where WhatsApp is ubiquitous. “We can ask directly [for] advice faster than [we could] as a partner reaching out [for] their support,” as well as piggyback on Shopify’s relationships, he said.
AI recommendation engine Crossing Minds is similarly looking to lean on Shopify’s expertise as it tries to expand its retail clientele. “The insight that they have on the ecosystem and e-commerce is priceless,” said CEO Alexandre Robicquet, noting that Crossing Minds’ founders and other investors are techies with no retail experience. For example, Shopify encouraged the startup to engage with agencies that build web stores for merchants.
Crossing Minds’ technology personalizes clients’ sites and marketing emails based on shoppers’ browsing and clicking, without relying on cookies or users’ personal data. Robicquet said Shopify was initially in discussions to acquire the San Francisco-headquartered firm; the commerce platform ultimately made a strategic investment of an undisclosed value in April. Shopify’s popularity among merchants makes it “an incredible stamp” for Crossing Minds as it tries to win commerce customers. “Funny enough, the toughest fight I had to make in negotiation [was] to be able to say we were the first and only one that they invested into [in our] field,” he recalls. “And we got it, so I’m very happy about that sentence.”
Shopify’s backing can also be a useful signal for VCs, according to Qasim Mohammad, director at Toronto-based Wittington Ventures, a retail-focused fund. “You [don’t] have ‘Death Star’ stamped on a startup because Shopify’s invested in them,” he noted—it’s not a guarantee that the firm will win its category But the potential strategic advantages of a Shopify connection may attract other funders.
As e-commerce innovation accelerates, Shopify’s investments also lets it hedge its bets by getting on the cap tables of companies that could “pose an existential threat in five or 10 years,” Mohammad said. It has backed a number of fintech, logistics and Web3 startups, including at least one that doesn’t yet integrate with its platform. “We invest in companies and technologies inside and outside our ecosystem that align with our mission and whose success at scale could positively impact our merchants,” Kanwar said in a statement to The Logic. Shopify declined to make him available for an interview.
As Shopify racks up venture deals, some developers are less enthused about its investing activity and recent changes to its app store. “It went from being an open marketplace to picking some favorites and giving people the ability to spend their way to the top,” said John Tedesco, CEO of Minneapolis-based Drip, which makes marketing automation tools for small- and midsized e-commerce brands.
Two Shopify investments in the fiercely competitive marketing technology space have attracted particular attention. In September 2021, Tel Aviv-headquartered Yotpo announced a “multi-year platform partnership” with the commerce platform, which invested US$30 million, sources told Israeli business publication Globes. Merchants on Shopify Plus, the enterprise plan, often use Yotpo’s review, loyalty and text apps.
“They need to explain why app developers shouldn’t be worried about this.”
In August, Klaviyo announced a US$100-million raise and new product partnership with Shopify. The Boston-based firm and other partners “receive early access to new Shopify development features” helping them to launch new tools “designed to help merchants navigate recent shifts in online marketing,” Shopify spokesperson Mimi Newman told The Logic at the time.
Tedesco called the Klaviyo deal “disappointing,” but said Drip’s business has not yet been directly affected. “The larger enterprise customers might find it valuable that Klaviyo has Shopify’s backing and may get early access to things.” Drip may not be seeing some sales opportunities as a consequence, he noted.
Others expressed similar concerns about Yotpo. “Large merchants who are looking for that enterprise-level credibility or agencies building those large stores would prefer to use the app where Shopify is more invested,” said one developer, speaking on the condition The Logic not reveal their name because their firm operates in Shopify’s ecosystem. “It gives Yotpo a bit of an unfair advantage to be able to sell to those kinds of clients.”
Shopify doesn’t appear to be promoting their partners’ most prominent products via its app store rankings, which would be immediately noticeable, the developer said. But they said the company has more room to showcase what it likes in the “picked for you” feature that merchants see in their store dashboards.
”We would lose all credibility if there was any favoritism.”
“While some partnerships include a higher level of integration between Shopify and our partner companies, we will always provide merchants with the ability to choose technologies that are best for their business,” Kanwar said in his statement. Developers whose products compete with services Shopify offers directly, and with products from companies in which Shopify has invested, continue to be listed in Shopify’s app store. For example, Affirm rivals Afterpay and Klarna are among the top results in a BNPL search.
Shopify has tried to reassure developers who’ve raised concerns about its venture activity. “We would lose all credibility if there was any favoritism,” president Harley Finklestein said on a September episode of “Limited Supply,” a podcast hosted by popular direct-to-consumer operators Moiz Ali and Nik Sharma. “The reason that people trust the app store … is because this is a place where you win by being too good to ignore [and] adding value.”
Rivo’s Chaney called Finkelstein’s comments “very reassuring.” He’s seen no sign that Shopify is playing favourites, noting his loyalty app outranks Yotpo’s. Shopify’s venture activity “shows that they’re committed to the platform and the app store,” he said.
Another ecosystem founder, who also spoke on the condition The Logic not name them, noted that tech giants like Alphabet and Salesforce have broken their investment activities out into separate venture arms, rarely taking stakes directly. By contrast, in late 2020 Shopify substituted its corporate development function for a new “product acceleration” team, led by longserving executives from the firm’s influential product organization. Kanwar was most recently general manager of the channels organization, handling relationships with the likes of Facebook, Google and Amazon. Vice-president Brandon Chu previously ran the platform group, which managed the developer ecosystem. (Kanwar, Chu and director Anna Lambert are all prominent Toronto angel investors in their own right).
Satish Kanwar, now Shopify’s vice-president of product acceleration, during the company’s Reunite virtual developer conference in May 2020. Photo: Screenshot | The Logic
The team’s name and staffing send the message that when Shopify makes an investment, it wants to integrate it into its product, the founder said. “If that is the case, then they need to explain why app developers shouldn’t be worried about this.” But as Shopify amasses an ever-larger portfolio of small stakes, it’ll have less attention to devote to each firm, the founder noted.
Some developers have also complained about other changes to the plugin marketplace. In February 2020, Shopify launched ads in its app store, letting developers pay to jump to the top of search results. In December 2021, it updated the app store’s design to show competing offerings for each app a user views.
Even developers dissatisfied over the changes, or over Shopify’s investing activity, say there’s no danger of them quitting the platform—its base of merchants is simply too large and lucrative. But they’re considering speeding up plans to expand their offerings to its competitors. “It’s not like people are going to stop building on Shopify,” the founder said. “But is the love gone a little bit?”
Shopify may instead find itself caught up in a regulatory crackdown on tech platforms. Lawmakers in the U.S. and EU—the company’s biggest markets are proposing new rules for app store operators, some of whom also face litigation from disgruntled developers. Both regulators and litigants have so far focused mostly on Apple and Google, which typically take a 30 per cent cut of download charges and in-app purchases.
Shopify has “been generally absent from antitrust or competition scrutiny,” said Vass Bednar, executive director of McMaster University’s Masters of Public Policy Program. “It’s never really brought up as [an] example and that’s partially due to market share and size.” If the company were to favour its portfolio firms in the app store, that would be a form of self preferencing, she said. Users expect that “the marketplace itself is not intervening to pick winners or losers.”
Shopify has been expanding its government relations presence in Washington, D.C., trying to make the case that it’s “different from other tech—and e-commerce—platforms.” According to an April filing, it’s lobbying Congress on the proposed Open App Markets Act, which would ban operators from favouring their own products or those of business partners, using developers’ data to compete with them, or requiring them to use its payments system. The restrictions would only apply to app stores with more than 50 million U.S. users. The EU’s new Digital Markets Act, on which Shopify has also registered to lobby, imposes similar conditions.
The company did not respond to The Logic’s questions about its government relations activity. It’s made proactive moves, announcing in June 2021 that it would take no commission on the first US$1 million developers make annually and dropping its cut to 15 per cent thereafter.
Shopify’s “app store dynamics are definitely less predatorial” than other tech platforms, according to Oppenheimer analyst Wong. Reduced fees, introduction of advertising and other changes help new partners get started and find an audience, he said. Shopify can offset the lost revenue with its stakes in more established developers, monetizing the stock when those companies eventually exit or IPO like Affirm and Global-e.
Shopify’s investments and tighter integrations with its chosen ecosystem collaborators can serve as inspiration, said Wong. “If you’re an app developer, you want to build your business up to where you eventually are that particular partner.”
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